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Frankfurt's financial district is pictured on March 24, 2020.KAI PFAFFENBACH/Reuters

The European Union markets watchdog is considering leverage curbs on hedge funds and private equity funds to shore up financial stability as the coronavirus outbreak roils global markets.

The proposal from the European Securities and Markets Authority (ESMA) could give more powers to countries like Spain, Italy and France – that have over the past week slapped bans on short-selling – a favoured trading strategy of hedge funds in particular.

“In situations when financial markets are under severe stress, highly leveraged alternative investment funds can further amplify systemic risk,” said Steven Maijoor, ESMA chair, in the release late on Friday.

The unwinding of large leveraged trading positions have been blamed for exacerbating the recent turmoil caused by the coronavirus pandemic in the past month.

The proposal follows recommendations in 2018 from the European Systemic Risk Board, an offshoot of the European Central Bank, to address liquidity and leverage risk in investment funds.

Neil Robson, partner at law firm Katten Muchin Rosenman, noted that the bloc’s market watchdog was seeking feedback by Sept. 1, and finalized guidelines will follow.

“The worst of the COVID-19 lockdown will hopefully be over by then,” he said.

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